A California Twist On Shareholder Action

After last week's presentation on "Did it Pass?" at the National Association of Stock Plan Professionals' 19th Annual Conference, I'm planning to devote a few posts to the subject of shareholder voting.  Living in a democracy, we all feel that we understand voting. However, voting is a subject that is rich with complexities.

California's Default Rule

California's default rule for shareholder action is:

[T]he affirmative vote of a majority of the shares represented and voting at a duly held meeting at which a quorum is present (which shares voting affirmatively also constitute at least a majority of the required quorum) shall be the act of the shareholders, unless the vote of a greater number or voting by classes is required by this division or the articles.

Cal. Corp. Code § 602(a).  I call this a "default" rule because it is the rule that applies when no other greater vote is required by the General Corporation Law or the corporation's articles of incorporation.  Here is an example of how the rule operates:

Example:  A corporation has 1000 shares issued and outstanding with each share entitled to 1 vote per share.  The holders of 600 shares are present at the meeting.  These shareholders cast their votes on a proposal as follows:

For

Against

Abstain

Broker
Non-Votes

250

25

20

305

Although far more votes are cast in favor of the proposal than against, the proposal does not pass under California's default rule.  Although the 250 FOR votes represent a majority of the shares represented and voting at the meeting (275), those votes do not constitute a majority (251) of the required quorum (501).

A Different Result Under Different Rules in Delaware and Nevada 

Under Delaware's default rule (8 Del. Code § 216(2)), the proposal would be approved because the 250 FOR votes represents more than a majority of the shares present and entitled to vote (295).  Nevada has a very different default rule (NRS 78.320(1)(b)) but the proposal would also pass under the Silver State's rule.  The 250 FOR votes represents more than a majority of the votes cast (275).